Does Microsoft Deserve Its Decade-Low Multiple?

Microsoft (NASDAQ:MSFT | MSFT Price Prediction) has integrated artificial intelligence (AI) into its products more extensively than most of its peers, with tools like Copilot embedded across its software suite and its Azure AI infrastructure sold out in key regions.Bullish analyses often focus on its potential to monetize Copilot through paid upgrades, but current adoption remains low at 3.3% of its user base. 

The market, though, appears skeptical, with Microsoft stock down 17% year-to-date and a drop of about 26% from its 52-week high around $555 per share. Shares now trade at a price-to-earnings ratio under 25, equivalent to where it traded back in 2015 when ratios hovered in the mid-20s. Considering the potential its AI integration holds, does Microsoft deserve this decade-low multiple?

Copilot’s Reach in a Massive User Base

Microsoft 365 Copilot is available to over 450 million commercial paid seats — or the number of authorized users or devices allowed to access a software application — providing a built-in platform for AI features like document summarization and data analysis in apps such as Word and Excel. This entrenchment positions Copilot for widespread use, with 15 million paid seats reported in January, reflecting 160% year-over-year growth. Azure, Microsoft’s cloud service, also incorporates Copilot capabilities, enhancing its appeal for enterprise workloads.

Azure’s AI infrastructure is experiencing high demand, with capacity sold out as demand backlog has doubled to $625 billion, partly driven by OpenAI-related commitments. Azure revenue grew 39% in the fourth quarter. 

However, the sold-out status stems more from supply constraints than unlimited demand. These include power shortages, equipment delays, and physical limits on data center expansion, with Microsoft acknowledging that constraints will persist at least through the end of its fiscal year in June. Such limitations could enable competitors like Amazon‘s (NASDAQ:AMZN) AWS and Google Cloud to capture market share by fulfilling orders faster in underserved areas, potentially slowing Microsoft’s ability to convert its backlog into revenue at the desired pace.

Copilot’s Strengths Versus Persistent Challenges

Copilot’s strengths include seamless integration with Microsoft’s ecosystem, enabling contextual AI assistance that boosts productivity in enterprise settings. It has tens of millions of active users across platforms, with features like meeting recaps in Teams showing measurable time savings. Paid adoption — while low at 3.3% of the 450 million base — generates revenue at $30 per user monthly (or lower for some business plans), potentially scaling to billions annually if conversion improves.

Yet weaknesses persist, including output inconsistencies and user retention issues. Surveys indicate that while many users initially prefer Copilot due to its accessibility, retention drops significantly after testing alternatives. Branding confusion and intrusive prompts further hinder satisfaction. Copilot monetization potential exists through upgrades, but current figures indicate slow progress, with far more users on free tiers than paid, leading to discounts of 40% to 60% in large deals suggesting pricing pressure to drive volume.

Competition also poses headwinds, with Copilot’s U.S. paid subscriber share dropping 39% from 18.8% last July to 11.5% in January. At the same time, Google Gemini has gained ground, and OpenAI’s ChatGPT holds a dominant position in broader AI usage. These rivals offer stronger performance in creative and research tasks, eroding Copilot’s edge. Capacity constraints in Azure could further limit growth by delaying AI deployments and new feature rollouts that rely on cloud infrastructure.

Key Takeaways

If Microsoft can monetize Copilot by increasing paid adoption and resolving its capacity needs through its planned infrastructure investments, today’s stock price appears undervalued considering its growth prospects. Its enterprise entrenchment provides a buffer, granting Microsoft more time to address quality, trust, and agility gaps that would challenge smaller firms. 

However, the market may not be wrong to assign this valuation until Microsoft demonstrates progress in these areas, particularly as competition intensifies and capacity issues constrain near-term execution.